Abolish IR35 and halt IR35 reforms due in April 2020
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This petition is on behalf of Contractors/Freelancers urging government to abolish IR35 and to undertake a holistic review of tax on freelancers. We request government to halt IR35 reforms in private sector due in April 2020 as an urgent first step.
The petition requests Government to give a clear statement that any tax reforms will have no retrospective taxation on either individuals or corporations as this has created an unnecessary environment of great fear. This has led many companies into blanket banning contractors from March 2020. The policy should be to encourage individuals to stay in jobs, earn more money and pay more tax rather than destroying an entire sector.
The petition wants government to give clear statement that IR35 does not apply on foreign assignments. This is going to set a precedent where UK workers will be encouraged to pay tax in foreign countries and only transfer income to UK. HMRC and UK will be a net looser here.
Finally, we urge HMRC/Government to look at all the below reasons in detail and refrain from giving a standard template reply. In the past Government replies have sighted non-compliance of IR35 as main reason to push for reforms. They also have suggested Tax gain in public sector for reasons to reform IR35 which is not entirely true as it does not take in account high costs public sector has been forced to bear. A third view is that truly self-employed do not get impacted by IR35 or its reforms but facts have proved otherwise.
An article by Julia Kermode some years back showed the impact of IR35 on public sector.
HMRC is justified in striving to increase their revenues but they should do it ethically. They should study the impact of IR35 and its reforms on broader economy rather than taking a short-term view of increasing revenue for them. Taxes will start decreasing and corporate costs will go up with IR35 reforms. I have discussed why this will happen in detail below. It seems HMRC are stuck in a time warp on IR35 and do not want to see beyond it. The government should not try to curb earnings of individuals. It should encourage people to earn more and tax clearly. In case of freelancers it should have a policy of give and take which rewards the entrepreneurship spirit.
Let us look at how IR35 reforms have a disadvantage on everyone including HMRC and then analyse why IR35 is a vague and toxic law.
Disadvantages for UK: -
1. A lot of short-term work has stopped coming to UK as our ability to get this delivered has become expensive and non-flexible.
2. Work not being done in UK means less tax for UK and less money on high streets /UK economy which will create a cycle of recession.
3. Freelancers create employment for Accountants, insurers and agencies who are also set to lose business.
4. All segments of self-employed community and almost all businesses are getting impacted negatively by IR35 reforms, be it builders, plumbers, oil workers, every industry has a horror story to tell about IR35. NHS is one of the most interesting examples of how trying to cap earnings/pensions or experimenting with IR35 can cause severe staff shortages.
Disadvantages for HMRC: -
5. VAT collected by Freelancer is often recharged back by corporates, however exception are financial companies which cannot claim back VAT as it is service for them. This will be a direct loss to HMRC.
6. Most contractors are on daily rate in range of 400 to 600 pounds. Some are on higher rates. They pay corporation tax and dividend tax. They also pay agencies, accountants, insurers, training companies, advertisers, networkers. Contractors being offered employment after IR35 reforms are in salary brackets of £50k to £60k. This includes pension savings. HMRC stands to receive less tax with people dependent on freelancing industry losing job and freelancers moving in average PAYE jobs.
7. HMRC believes that a lot of contractors will simply move into umbrellas with IR35 reforms. Many banks in the city have fired thousands of contractors. Many banks are also hiring expensive consultancies that are using their bases in Europe to get this work done. Result is that UK companies have a higher cost and there is less tax for HMRC. The cycle is even more vicious as money spent in UK economy is decreasing as freelancer’s loose job.
8. A lot of contractors working in Europe (and this is not a small number) are insisting agencies to tax them in Europe to have certainty. Previously lot of UK workers used their Limited companies but now feel it is safe to work and get taxed in Europe. Even a number of companies have realised this and moving work to Europe to have certainty.
Disadvantages for Corporates: -
9. Reforms pose an unnecessary burden on companies for getting IR35 assessment right. HMRC has struggled to assess IR35 status correctly in past and have suspected all daily rate contractors to be inside IR35. This is proved by HMRC sending blanket letters to all GSK contractors.
This is an area where many contractors have won cases against HMRC in courts. How can anyone get this status right when HMRC can get it wrong? The result is a recent penalty on NHS
To be fair to HMRC, IR35 is a vague law which can be interpreted in many different ways for the same case.
10. Corporates are taking services of expensive consultancies paying them exorbitant costs as they don’t want hassle of assessment and penalties. These consultancies are hiring cheaper resources from Nearshore (Europe), Offshore (Asia) and Best shore. The author has seen banking jobs going to Zurich as corporates want zero risk of HMRC penalties and bad reputation.
11. Corporates in many cases are blanket assessing their contractors as inside IR35 which is delaying work and leaving a wide gap for legal battles. In one case, HMRC ended up paying holiday pay to avoid a legal battle.
Is IR35 ethical?
Government want to encourage big companies which is super and welcome. However, it has a narrow mind-set for individuals who want to earn money as a company. This is encouraged by jealous permanent folks or people having incomplete information who look at freelancers in envy. No one has stopped them from doing freelancing and they easily discount benefits they are getting that a freelancer doesn’t. This includes better work; freelancers always get shoddy work. Freelancers don’t get holidays, company pension or pension top ups, sick leaves, trainings, company benefits or even a redundancy when they leave. Their notice periods are very small and they are forced to take furloughs or work over holidays when everyone is enjoying. The new dividend tax has made tax same between freelancers and employed. If there is any difference, it is Employer NI which for permanent staff is paid by corporates. This can easily be compensated by making VAT as a service charge.
Let us look in detail: -
12. The same set of work done by large limited companies will always be taxed under corporate laws. It is the small freelancer who is suspected as a Tax avoider/Fraudster for trying to follow a limited company structure. A daily contractor at a Bank should do PAYE but if PWC offers a resource for same work, then PWC can pay its resource salary and keep remaining money as limited company. It clearly shows how government is ok with earnings of big business but not with earnings of individuals. The vague nature of IR35 allows big corporates to charge higher to clients and pay lower salaries to employees but prohibits contractors to do same set of work directly with clients and pay like limited company. This is what is called disguised employment.
13. Freelancers pay corporation tax on their earnings before they keep money in their company. Any money withdrawn further is subjected to dividend tax or Entrepreneur tax if the company is being closed. A lot is made of this money kept in company or sharing income with spouses. However, most contractors are out of work at some point of time and this period is from 1 to 6 months. The money in company stops us from claiming benefits or our spouses to go and claim benefits. This money is used for reskilling or networking at times we are out of work. In this regard, again a policy of give and take is suggested. Freelancers will be happy to follow a clear law.
14. An article by contractor calculator shows how the new dividend tax makes earnings and taxation similar between contractors and employees. The total tax on an income of £100k for an employee is £33461 which is around 33.46%. Employer NI is paid separately by employer. Freelancers already pay Corporation/Dividend tax. HMRC can possibly tax us at a certain fixed percentage considering our risks but more tax that we bring to economy. VAT as service charge can compensate employer NI.
15. Contractors use structure of the limited company because of engagers, as engagers don’t accept people with a self-employed status. These contractors if self-employed would have paid Class 2 NI and settled their income with their spouses. The government therefore does not want contractors to follow the self-employed route.
16. Everyone benefits from this gig-economy. Big Business want flexible workforce for short-term work. A lot of working class wants flexibility away from appraisals and working continuously.
17. Fear of IR35 led a lot of evil promoters in concocting schemes which lured contractors seeking certainty. These contractors now face exorbitant bills from HMRC called Loan charge which is bankrupting contractors and has forced many of them to suicide.
18. HMRC suggestion that truly self-employed do not need to worry seems incorrect as recently all GSK contractors were sent letters with the suggestion that they are suspected to be Inside IR35. This is a wrong psychological tactic to scare people in paying more tax. It will force corporates hiring freelancers into blanket banning them. HMRC itself will get involved in expensive legal battles if a few contractors decide to fight it out. HMRC has lost several cases in past meaning that either they do not understand their own law or its vague nature makes it difficult to understand it.
19. HMRC have only now given a CEST tool and asked freelancers to use it and determine their status. This was not previously available. However, in one of the cases they refused to accept the result in a court case. https://www.contractorcalculator.co.uk/hmrc_refuses_stand_irrelevant_cest_ir35_551410_news.aspx
20. HMRC has now revised the CEST tool. But the point is that this toxic cycle of retrospective chasing freelancers needs to be stopped and the taxman needs to give a clear law to freelancers rather than keep experimenting with IR35.
21. A lot of Contractors because of IR35 reforms are being blanket assessed as inside IR35. Many of us have seen our contracts terminated. A number of other contractors have seen rates being cut by 25% as the cartel of umbrellas/corporates don’t want to pay employer NI/Holidays.
We urge government to have simpler laws that can be interpreted as black and white. These laws must encourage flexibility, people to earn more and pay more tax rather than laws where people will think it is better to earn less.
The Law came into being in 1999 with the main arguments
· “There are clearly cases of Friday to Monday" — leaving on Friday as an employee and returning on Monday to the same job as a hired consultant — which would be considered to be avoiding the payment of the correct Income Tax and National Insurance.
· It is unfair that two workers performing the same tasks should pay different rates of Income Tax and National Insurance, when there is no difference between their working arrangements;
· The personal service company pays Corporation Tax on the dividends paid to the disguised worker operating through his personal service company and is considerably lower than personal Income Tax. Dividends do not attract National Insurance so therefore the worker would pay no National Insurance.
The government can work on various options to have more tax while having simpler laws: -
A. Time bound approach for freelancers to work as a limited company. This can be the same set of rules as for expenses which is currently 2 years. Freelancers at same location for more than 2 years can do PAYE. HMRC can further reduce this timeline for Friday to Monday cases.
B. There is a complaint from HMRC that contractor expenses reduce corporation tax. HMRC can give a fixed percentage of allowed expenses like 5-7% of revenue except travel which will help contractors manage their company. However, travel is an area which is dependent on client location. HMRC can mitigate it by making Travel expenses acceptable if recharged to the client/agency. They should however encourage companies to write contracts in such a way. Contractor travel expenses are same as done by permanent staff.
C. The total tax on an income of £100k for an employee is £33461 which is around 33.46%. Employer NI is paid separately by employer. HMRC can possibly tax us at a certain fixed percentage considering our risks but more tax that we bring to economy. This can be sharing income with spouse or some reduced percentage of tax. VAT can be made a service charge compensating for Employer NI.
One of the major advantages UK always had is its flexible workforce. If we destroy this advantage then we will be the ultimate losers.
The author feels HMRC wants to improve its revenues but the procedures followed are draconian. Tough tax measures have impacted our manufacturing and retail business and now in name of tax, we can destroy our broader economy. We compare ourselves with Nordics in terms of taxation but do not realise that our population is much bigger. A comparison more likely with Singapore should be done. Similar other measures such as 40% inheritance tax have only encouraged trust formations. We could have made this as 10% capital gains on inheritor which would have made it far easier to transfer company shares and improve revenue or the extra stamp duty which is only reducing revenue progressively. Joint incomes/ISA’s or pensions with spouses can help reduce tax credits. A fresh approach on taxes is required rather than trying to make cosmetic changes to old laws. IR35 reforms will increase costs for companies. The first thing they will do is shed employees, then employ external outsourcers and then move abroad. This happened to manufacturing. Author supports globalisation and healthy migration as it helps competitiveness. However, a clear taxation law in UK will help corporates and individuals to work freely without fear of being on wrong side of taxman. HMRC may be right they may collect more revenues for a year but as soon as employees reduce, work moves abroad, the revenue will decrease. More revenue should come from more growth but in UK we are continuously chasing more revenue even as industries are failing.
Through this petition author wants government to replace IR35 with a clear law.
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